There are plenty of reasons to expect a big move in Groupon Inc (NASDAQ:GRPN) stock following Groupon earnings on Wednesday. The simplest one is history. After the last three Groupon earnings reports, GRPN stock has gained 23% (Q4), lost 22% (Q3), and gained 29% (Q2).
More broadly, there’s the sense that Groupon’s business model is facing what could be its last chance at success. Since taking over in late 2015, CEO Rich Williams has “streamlined” the business, cutting headcount and reducing the global footprint from 47 countries to 15.
Groupon has ramped up marketing investments and discounting. It has cut its take of deals, and in many cases cut the discount offered to customers as well.
The business seems to be where Williams wants it. That, in turn, means that the long-running bull/bear debate over GRPN stock seems likely to have an answer. Is the company a valuable marketing tool with a dominant market share, as GRPN bulls argue? Or are bears right? Is Groupon nothing but a camouflaged predatory lender whose 2011 IPO benefited from nearly perfect timing?
The truth, as often is the case, likely is somewhere in the middle … but the response to Groupon earnings seems likely to be anything but.
What to Watch for in Q1 From GRPN Stock
Given the apparent stakes of the Groupon earnings release, consensus estimates seem almost too perfect. The average Street analyst is expecting a non-GAAP loss of a penny a share, and a 1% decline in sales.
In other words, there are two outcomes from Groupon earnings, barring a bizarrely accurate consensus forecast. Either the company beats — and grows year-over-year. Or it misses estimates — and the business shrinks. Either outcome seems likely to have an exaggerated impact on the post-earnings ‘story’ for GRPN stock.
If earnings beat, then Groupon is “back to growth,” and analysts and investors are underestimating its potential. If they miss, Groupon “remains a declining business,” with turnaround expectations having arrived far too soon.
The headline numbers will matter significantly, in a way that’s not always the case. (See, for instance, Apple Inc.’s (NASDAQ:AAPL) Q2 report.) It’s probably too early to declare Q1 an inflection point for the business — but it’s not too aggressive to argue that investors will see it that way, at least in post-earnings trading.
Groupon’s Marketing Spend
The one key figure below the headlines to watch is marketing spending. As noted, Groupon has increased its marketing in a bid to recapture dormant users and add new ones, particularly in key North American markets. Marketing spend in 2016 increased nearly 43% year-over-year, per the 10-K.
The biggest danger for GRPN stock coming out of Q1 is a revenue miss combined with an unexpected uptick in marketing expense. Coming out of Q4, the company guided for spend to increase along with overall billings in 2017. If those billings and/or revenue disappoint after a huge marketing spike last year and with a larger-than-expected increase in Q1, the bearish long-term concerns toward Groupon’s business model will have significant support. And that can take a huge chunk out of GRPN stock.
How to Play Groupon Earnings
All told, Q1 seems like the first real chance for the company to answer the questions surrounding its business model. That makes Groupon earnings more important, perhaps, than might normally be the case for a single quarter. It also suggests that GRPN stock is likely to move sharply, depending on its results.
The question for investors is what to do about it. I don’t see much traction from either the bull or bear case at this point. And as volatile as GRPN stock has been after earnings, its mid-term performance is reasonably flat. Groupon shares have risen 9% over the past year, for instance — underperforming the S&P 500 in the process.
The options market isn’t much help, either. Current straddle prices (at $4) imply a 14%-plus move in GRPN stock post-earnings. And while it has exceeded that move in each of the last three quarters, there’s still a tremendous amount of volatility priced in.
If anything, Groupon looks like a “wait and see” play — from either side. The Q1 numbers are going to matter, and they will move the stock (though perhaps not 14%-plus). But they also will give a better understanding of the long-term trajectory for Groupon and GRPN stock. Ahead of the report, that trajectory just doesn’t look clear enough.
As of this writing, Vince Martin had no positions in any securities mentioned.